The former chair of the United States Federal Deposit Insurance Corporation, Sheila Bair, recently published an article imploring the U.S. Federal Reserve to explore central bank-issued digital currencies (CBDCs). In the article, Mrs. Bair argues that the development of a state-issued cryptocurrency could “reduc[e] the risk of financial crises” and “improv[e] monetary policy tools.”

The former FDIC chair begins the article by discussing the increasing proliferation of financial crises across major economies, such as the “Europe[an] sovereign debt crisis” and national crises recently felt in “Portugal, Venezuela, Russia, Ukraine, [and] Brazil.”

The article describes “Lack of confidence in [the] banking system” as the principal catalyst for Satoshi Nakamoto’s choice to develop bitcoin, asserting that “He (she, they?) originally intended it as a widely accepted method of payment that could function completely outside of the banking system.” However, Mrs. Bair states that “Unfortunately […], bitcoin has failed miserably as a method of payment” – blaming such on the “extreme volatility [that] has made it popular as a speculative investment and store of value.”

The former FDIC chair advocates that central banks issue their own digital money, describing such as “a radical idea that […] is gaining credibility among an increasing number of mainstream economists and central bankers themselves.” Mrs. Bair describes central bank-issued digital currency as “presumably […] be[ing] as stable as traditional fiat currency, while reducing the risks of financial crises and improving monetary tools.”

Benefits of CBDCs

Mrs. Bair asserts that the development and issuance of CBDC could provide greater financial stability in times of economic crisis, stating that “in times of extreme stress, people lose confidence in their banks. So they pull their uninsured money out of the banking system, disrupting the free flow of payments. […] However, suppose consumers could convert their bank deposits into a digital currency that would be issued and backed by the Fed? […] They would no longer need to worry about bank instability.”

The former FDIC chair also states that “the Fed would have much more effective tools for conducting monetary policy to address economic cycles.”

“The Fed now manipulates the money supply through buying and selling securities with a select group of big banks and by paying them interest on the reserves they deposit at the Fed — currently a tidy 1.75%,” Mrs. Bair continued. “When the Fed wants to stimulate the economy — as it did after the crisis — it buys securities from these banks and reduces the rates it pays them on reserves, inducing them to lend the proceeds to the real economy to get a better return. When it wants to raise rates — as it is doing now — it reduces its holdings of securities and increases the rates it pays on reserves. This is a nice deal for the banks, but hasn’t done a whole lot to help the rest of us. The past 10 years are proof positive that current monetary tools are woefully inadequate to stimulate broad-based economic growth. The super rich have gotten a lot richer, while the middle class has struggled.”

The former FDIC chair emphasizes the creative destruction that a “wholesale shift from bank accounts to CBDC” would have on the “current bank-dominated payments system,” stating that such “could have severely negative consequences for credit availability given banks’ reliance on deposits to funds loans.”

Mrs. Bair asserts that “the costs and inefficiencies in the current payments system would be greatly reduced.” The former FDIC chair claims that consumers would benefit from “no longer need[ing] to maintain checking accounts, with their expensive maintenance and overdraft fees, to effectuate payments,” whilst businesses accepting CBDC “could avoid the interchange fees charged by banks and their card networks – fees that are particularly burdensome to small firms.”

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